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Cash-basis profit and loss equals a company’s cash received from sales minus its cash expenses during an accounting period. A company reports its sales, expenses and cash-basis profit or loss on its profit and loss statement, which is also known as a P&L or an income statement. A cash-basis profit and loss statement does not conform to generally accepted accounting principles and, therefore, is typically used only by small businesses that don’t report to outside parties.

Sales Revenue

Sales revenue increases profit and reduces a loss. The sales revenue a company reports on a cash-basis profit and loss statement includes only cash collected from selling its products and services. If a business completes a sale to a customer and expects to collect payment at a later date, it reports the revenue only when it collects payment. For example, if your small business sold $12,000 in products during the quarter but collected only $10,000 from its customers, you would report $10,000 on your cash-basis profit and loss statement.

Expenses

Expenses reduce profit and increase a loss. Expenses on a cash-basis profit and loss statement include only those for which a company has paid cash. If a company incurs an expense, but will pay for it in a future period, it would exclude that expense from the current statement. For example, assume your small business incurred $8,000 in expenses during the quarter. If you paid cash for only $7,000 of expenses and plan to pay the remaining $1,000 next quarter, you would report $7,000 in expenses during the current quarter.

Determining Profit or Loss

A company reports its profit or loss at the bottom of the income statement. Profit, or net income, is a positive number and means that cash collections exceed cash expenses. A loss means expenses exceed collections and is reported as a negative number, usually indicated by enclosing the figure in parentheses. For example, if your small business has $10,000 in cash collections and $7,000 in expenses on its cash-basis profit and loss statement, this represents a $3,000 profit.

Considerations

GAAP requires a company to use the accrual basis of accounting to report revenues and expenses on its income statement. Under accrual accounting, a business reports revenues and expenses when they are earned or incurred, regardless of when cash payment occurs. The profit or loss a company reports on its cash-basis P&L typically differs from the profit or loss calculated on an accrual basis. A company should always disclose on its cash-basis profit and loss statement that the statement was prepared on a cash basis rather than an accrual basis.